Will vs. Trust: How Are They Different & Do You Need Both?

Understanding Wills

A will is a legal document outlining how you want your assets distributed after death. It also allows you to name a guardian for minor children and an executor to manage your estate.

The key benefits include simplicity in setup, clear direction for the distribution of assets, and the ability to nominate guardians. However, limitations involve going through the probate process, which can be time-consuming and costly, and the public nature of probate, which lacks privacy for the estate's details.

Understanding Trusts

A trust is a legal arrangement in which a third party (trustee) holds and manages assets on behalf of beneficiaries, offering a way to control when and how your assets are distributed.

A trust can be established as a living trust formed while you are alive or a testamentary trust formed as part of executing your will after death. Revocable trust terms can be altered while you are alive, while irrevocable trust terms cannot.

Key benefits include avoiding probate, providing for minors or special needs beneficiaries, and potentially reducing estate taxes. However, limitations include the complexity and cost of setting up and maintaining a trust and the irrevocable nature of certain trusts, which limits flexibility in changing the trust terms or beneficiaries after it is established.

Several types of trusts are commonly used as estate planning tools, including charitable trusts (charitable remainder trust, charitable lead trust), special needs trusts, spendthrift trusts, and life insurance trusts. The type of trust right for you will depend on your wishes and financial priorities.

Key Differences Between a Will vs Trust

When comparing a will vs a trust, several key differences stand out, impacting how each tool is used in estate planning:

• Effective Timing: A will takes effect only after your death, while a trust can take effect as soon as you create and fund it. 
• Probate Process: Assets distributed through a will must go through probate court, a public and often lengthy legal process that can be costly. Trusts allow assets to bypass probate, offering a more private and faster way to manage and distribute assets.
• Privacy: Wills become public records once they enter the probate process, making the details of the estate accessible to anyone. Trusts remain private documents, and their terms and assets are not made public through court proceedings, E.g., Family business and real estate.
• Control Over Distribution: Trusts offer more flexibility and control over how and when your assets are distributed to beneficiaries. Wills provide a one-time distribution upon the probate process's completion, with less room for specifying terms over time.
• Complexity and Cost: Generally, creating and funding a trust is more complex and expensive upfront than creating a will. However, due to avoiding probate, the cost and time savings on the back end can offset these initial expenses for a trust.
• Guardianship: Only a will can appoint guardians for minor children, making it an essential document for parents regardless of whether they also have a trust.
• Types of Assets Covered: Trusts can only control assets formally transferred to the trust. In contrast, a will can cover any property solely in the deceased's name at the time of death.
• Tax Implications: Wills do not typically offer immediate tax benefits, while certain types of trusts can help minimize estate or inheritance taxes.

Each tool has its place in a comprehensive estate plan, and often, individuals will utilize both to cover different needs and assets, ensuring their estate is fully managed according to their wishes.

When to Choose a Will or Trust?

Scenarios Where a Will Is Sufficient

A will can be sufficient and the most straightforward tool for estate planning in several scenarios, particularly when simplicity, cost, and specific circumstances align with an individual's goals and needs. Here are some examples:

1. Smaller Estates: In cases where the estate is relatively small and falls below the threshold for probate in a given state, a will may be all that's needed. Some states have simplified probate processes for smaller estates, making a will a cost-effective option.
2. Direct and Simple Bequests: If your wishes for asset distribution are straightforward—for example, leaving everything to a spouse or dividing everything equally among children—a will can easily accomplish this without the need for the more complex structures of a trust.
3. Nomination of Guardians for Minor Children: For individuals or couples with minor children, a will is essential for appointing guardians. This cannot be done with a trust. If ensuring the care of minor children is your primary estate planning concern, a will is sufficient and necessary.
4. Individuals with Limited Assets: For those with limited assets and whose primary concern is to ensure that specific personal items or small sums of money go to certain people, a will can be an adequate tool for expressing these wishes without the need for a trust.
5. Estate Plans That Benefit from Probate: In some situations, the oversight of the probate court can be beneficial, such as when there might be disputes among heirs or when the executor needs the court's authority to act decisively. A will ensures that the probate process is followed, providing a structured resolution process.
6. Simplicity and Cost Concerns: For those prioritizing simplicity and minimal upfront costs in their estate planning, creating a will is less expensive and complex than setting up a trust. This may appeal to those who like a straightforward approach to estate planning.
7. Estates with Clear Debt Situations: In cases where debts may not be significantly more than assets, the probate process can help manage creditors in an orderly way, ensuring that debts are paid from the estate before distribution to heirs. This scenario might make a will more suitable for the estate's needs.

Situations Where a Trust is Preferable

A trust can be preferable in various estate planning scenarios, especially when specific goals and complexities require the unique benefits that trusts offer. Here are some situations where a trust might be more suitable than a will:

1. Avoiding Probate: A trust is preferable for those wanting to avoid the time-consuming and often costly probate process. Assets held in a trust are transferred to beneficiaries without going through probate, providing a quicker and more private distribution process.
2. Privacy Concerns: Unlike a will, which becomes a public document once it enters the probate process, a trust remains private. A trust is a better choice for individuals concerned about keeping the details of their estate and asset distribution confidential.
3. Managing Assets for Minor Beneficiaries: If you wish to leave assets to minor beneficiaries and control how and when those assets are distributed (e.g., age milestones for inheritance), a trust allows you to specify these terms, unlike a will.
4. Property in Multiple States: A trust can avoid multiple probate proceedings for those owning property in more than one state. Without a trust, each property might have to go through probate in its respective state, complicating the process.
5. Incapacity Planning: A trust can be used to manage your affairs if you become incapacitated. By appointing a successor trustee, the trust ensures that your assets are managed according to your preferences without needing court-appointed guardianship or conservatorship.
6. Tax Planning: Certain types of trusts can help minimize federal estate taxes for individuals with complex estates, making them a valuable tool for tax planning. Trusts can be structured to reduce the taxable estate, benefiting heirs financially.
7. Special Needs Planning: A special needs trust can provide for a beneficiary with disabilities without jeopardizing government benefits like Medicaid or Supplemental Security Income (SSI) eligibility. A will cannot achieve this directly.
8. Protection from Creditors and Divorce: Trusts can offer protection for your beneficiaries against their creditors or, in the event of a divorce, safeguard the assets from being claimed by creditors or divided in a divorce settlement.
9. Complex Family Situations: For those with complicated family dynamics, such as blended families or the desire to disincentivize certain behaviors in beneficiaries, a trust can offer the nuanced control necessary to address these issues effectively.
10. Business Succession Planning: A trust can facilitate the smooth transition of business ownership or interests without the delays and complications of probate, which is crucial for maintaining business operations after the owner's death.

Can You Use Both a Will & Trust?

You should often use both a will and a trust as part of a well-rounded estate plan. Here's why:

• A Trust Covers the Bases: A trust focuses on transferring assets quickly, avoiding probate, and enabling continued asset management.
• A Will Catches What Might Fall Through the Cracks: A will acts as a safety net for several key elements a trust can't handle:
  • Naming Guardians: Only a will allows you to designate legal guardians for minor children.
  • Executor: You name an executor to oversee the administration of your estate.
  • Catching Unassigned Assets: A "pour-over will" directs any assets not placed into the trust during your life to be transferred to the trust upon your death.
  • Specific Instructions: You can include specific instructions for funeral arrangements or bequests of sentimental items that may not fit within the trust's structure.

Working Together

A well-structured estate plan often includes both a trust (usually a revocable living trust) and a pour-over will. This combination ensures a smooth transition of your assets, such as financial accounts or retirement accounts, even if they were not added to the trust while you were alive.

Consulting with an experienced estate planning attorney is crucial to making the right decision. They'll help you assess your specific needs and create a comprehensive plan keeping your goals in mind, including both a will and a trust if that's your best approach.

Conclusion

Estate planning is about taking control and protecting what matters most. By understanding wills and trusts, you gain the power to shape your legacy. Whether you choose a will, a trust, or a combination of both, taking action now ensures your assets are distributed according to your wishes. Don't delay.  Start your estate planning today!

Sources

1. American Bar Association - Introduction to Wills. https://www.americanbar.org/groups/real_property_trust_estate/resources/estate_planning/an_introduction_to_wills/.
2. Legal Information Institute, Cornell Law School - Trust. https://www.law.cornell.edu/wex/trust.
3. Free Will from Fabric by Gerber Life, a member of the Western & Southern Financial Group Family of Companies. https://www.westernsouthern.com/about/family-of-companies.